On Taking Risks
“Don’t be too timid and squeamish about your actions. All life is an experiment. The more experiments you make the better.”
― Ralph Waldo Emerson, Journals of Ralph Waldo Emerson, with Annotations – 1841-1844
Everyone takes risks. Some more so than others. But without risks, our lives will really be like vegetables. We make most decisions based on partial knowledge and broad estimates. That’s risk taking. Risks let us take a step away from the hum drum of the daily motions of life and peek into the world where free will is really a thing. Risk, by definition, is something that goes against the normal, default mode of operations, though for some people, taking risks gets baked into their normal processes as a matter of course. But for most people dwelling on this planet, risk-taking is synonymous with deviation, away from the traditional mode of being. Some risks aren’t risks at all. They are just calculated bets that people take on their professional and personal careers. Going to college, taking up a job instead of doing nothing, shifting cities for a job, marrying a friend, etc. These are decisions that people take in their normal course of being, so not necessarily risks.
What if risks are just boundary conditions that our creators have built for us to make us stay in their controlled environment for whatever tests they are conducting on us? Somewhat like that Jim Carrey character in the movie The Truman Show, where unbeknownst to him, he is subject to a test and where everyone else is a willing complicit. Only in this case, the whole world is unaware of the real nature of risk.
What if this is true then? That does mean that death isn’t death at all, and it is just our passage out of this controlled environment we call earth.
Our brains are conditioned through our experiences to observe events and happenings around us through the inbuilt biases, heuristics, mental shortcuts. Our interpretation of risks is therefore influenced by these conditioning with the result that we have varying levels of risk-taking capabilities depending on what we do and do not consider as high-risk.
There are few people around us though who seem to transcend this normal relationship with risk and up their game on challenging their creator. The expeditioners, mountaineers, space astronauts, solo climbers, political reporters, spies, etc. seem to inhabit a different world when we look at the life choices they make. In Finance, the term risk-reward is a weighted term that describes the positive feedback role that reward plays in our assessment of risks. And yet, there are biased involved when it comes to negative versus positive risks with human mind conditioned to reflect on negative risks more strongly than a corresponding positive one.
There are some professions that are, by design, tailored to respond more to risks in a disproportionate way. Angel investing, venture capital, acting, music, extreme sports, etc. have a massive upside when intelligent risks go your way. They also require a different brain chemistry that enables you to manage 100 losses for that one 100x deal that slices its way through the debris to rise and shine. There are biological connections to how we interpret risks. Risk, like stress, has implications beyond the psychological and affects our physical bodies too. A cocktail of dopamine and testosterone seems to expand our ability to take risks. Sociological experiments depict humans as embodied brains instead of disembodied minds. That is, our brains regulate hormones and enzymes in our bodies to respond to external stimuli, including for perceived risks.
Across medicine, finance, gambling, etc. our understanding of risk and its impact lies on a spectrum with excessive risk-taking abilities (think Wolf of Wall Street) to petrified risk aversion. Our conditioning and motivators drive our ability to perceive, decide, and respond to risks in the environment around us. Risks are manifested in uncertainties and a grasp of probabilities can impart both risk intelligence and overzealous complacency depending on how much you depend on it. As Nassim Taleb points out, our ability to be a turkey is dangerously under-rated. And so does our ability to understand those low-probability, high-impact risk events that is lovingly termed “black swan”. Biases across confirmation bias, hindsight bias, etc. inhibit our ability to manage risks, especially with these black swan events where history is determinably a poor predictor.
A reframing of risks around managing outcomes versus predicting occurrence is one of the many solutions that experts tout could help executives and your average joe. Recommendations of commission versus omission has differing impact on our ability to interpret risks; Grandmasters focus on avoiding errors, rookies try to win.
Different people also have different levels of trust in the “system’s” ability to manage risks competently. E.g., reliance on WHO or CDC to drive the right response to dealing with COVID varies across folks in US. What drives this? Ideology, conditioning, and history or an internal system developed and evolved to respond to uncertainty differently? Is self-reliance and the whole Rawlesian sub-culture an artefact of history or driven by our internal physiological processes? Is brain the driver or merely the reactive agency?
Whatever it is, building Risk intelligence is key to survival in the increasingly inter-connected and complex world of rapid information flow and data exchange that we live in. As data flows in the blink of a second from one part of the world to the other, it leaves little to no time to think through the risks of one’s actions to a decent level of confidence. In that case, when everyone is predicating decisioning through incomplete and hasty means, having a systematic approach to developing Risk intelligence is key. Below are a few areas you can think of when going about it:
- Break problems into chunks to make your estimates more real and certain
- Transform assessment of risks into numerical estimates – it lends a semblance of sophistication that helps you measure and track risks
- Know that you aren’t as good with reading people as you think
- Framing of choices to suggest certainty versus uncertainty leads to faster decision making; “what’s mathematically equivalent isn’t psychologically so”
—-
Notes:
- Risks, like stress has implications beyond the mental. It affects your physical body.
- Risks are manifested in uncertainties. Not knowing the outcome from an action drives the formation of risk. Higher the uncertainty, the more the risk involved.
- Misunderstanding probabilities – many people do that – across medicine and finance
- Imparts an illusion of certainty when really there is none
- The reliance on intuition – humanity’s holy grail through eons of evolutionary growth
- Intuition as a form of unconscious intelligence
- Public perception of risks is sometimes justified and more accurate than what risk models are suggesting from experts. In complex systems, models are bound to be off course versus the intelligence of masses that may be signaling something
- People fear unlikely hazards (mad cow, swine flu, shark attack) disproportionately versus risks in everyday life (dying in a car accident)
- At the same time, our ability to predict low-probability, high-impact events is limited at best. The so called “black swan” events cannot be predicted and its more prudent to focus on consequences and eventualities. Also called scenario analysis and preparation.
- Studying the past – hindsight bias – isn’t going to help manage risk for the black swan events
- Recommendations of commission versus omission has differing impact on our ability to interpret risks; Grandmasters focus on avoiding errors, rookies try to win.
- Different people have different levels of trust in the “system’s” ability to manage risks competently. E.g., reliance on WHO or CDC to drive the right response to dealing with COVID
- Cortisol levels rise as volatility increases – for traders
- Risk preferences are not a stable trait – they change and shift depending on the stress involved and the challenge
- A cocktail of dopamine and testosterone expand our ability to take risks.
- Humans as embodied brains instead of disembodied minds
- Spectrum across moving from excessive risk taking to petrified risk aversion
- Social conformism affects our ability to interpret risks – we want to be liked, and in our quests, we discard risk signals
- Risk intelligence:
- Break problems into chunks to make your estimates more real and certain
- Transform assessment of risks into numerical estimates – it lends a semblance of sophistication that helps you measure and track risks
- Know that you aren’t as good with reading people as you think
- Framing of choices to suggest certainty versus uncertainty leads to faster decision making; “what’s mathematically equivalent isn’t psychologically so”
Source:
Jargogled Impressions. 
Leave a comment